It's no secret that corporations are sitting on huge piles of cash these days. In fact, by the latest count companies have close to $2 trillion in cash and other liquid assets on their books. While it's understandable that companies are a little gun-shy after the recent economic downturn, as the economy improves the issue becomes: what do these companies do with all of that dough?
That's not a bad problem to have.
Companies with lots of cash on hand are able to capitalize on various investment opportunities fairly easily. They can make acquisitions or grow organically without going to the costly debt or equity markets in order to fund their growth. And if they do seek financing, investors will require much lower rates of return than if the company was cash-strapped.
Secondly, companies with plenty of cash can reward shareholders through stock buybacks or dividend payments. This is especially true of mature companies. Larger companies have fewer growth prospects, so it makes sense to return an increasingly large portion of earnings to shareholders.
Think about Microsoft (MSFT - Analyst Report) in the 1990s compared to the 2000s. The company grew tremendously for several years, but inevitably that growth slowed. Now the company rakes in the dough and pays out a decent amount to its shareholders. It began paying a dividend in 2003 and paid a special dividend of $3.00 per share in 2004. The company recently raised its quarterly dividend 23%. Expect more dividend hikes in the future. (more)
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